The British may do everyday things in an odd way — like drive on the wrong side of the road — but when it comes to investigating the different ways in which the consumer can be ripped off, it can sometimes teach America how to make life better. Before coming to car insurance, let’s briefly consider the business practices of Amazon. Now you may think this online retailer is doing a great job by regularly offering discounts on the products it sells. But here’s the problem. When people sign up to sell through Amazon, they have to swear on a stack of bibles that their products will never be sold at a lower retail price anywhere else. Pause to think about this. It ensures that Amazon will always have the lowest price. Why is that a bad thing? Because Amazon could offer to sell a book or CD at $20. If any other retailer offered the same book or CD at $15, Amazon would sue. In other words, it suppresses competition on price.
Having established the basic principle, the British car insurance companies are allowed to sell directly, whether online or through agents, and to make their policies available to price comparison sites. The British government works through the Competition and Markets Authority to ensure nothing distorts the normal process of competition in a free market economy. When they came to look at the way in which these comparison sites were displaying prices, they appeared to be showing consumers which insurers were selling coverage at the lowest prices. But the majority of the insurers had entered into sweetheart deals with the comparison site operators.
All the major sites were run on the basis of terms imposing price parity on the insurers, i.e. just like Amazon, the insurers were under an obligation not to offer their policies at a lower price. However, the terms went further by also preventing the insurers from offering their policies through other third party sites. So the car insurance companies using the top comparison sites could sell their own policies directly, but could only sell through one price comparison site. As you will understand, this creates a form of monopoly in which the auto insurance rates are effectively set by the one price comparison site having the price parity control. Not surprisingly, the British government has now banned this type of clause. That has restored price competition across multiple sites, and allows the individual insurers to cut their direct selling prices if they want to. Unfortunately, American regulators do not consider this to be a problem. Just as Amazon has been allowed to manipulate price competition for all the products it sells, so the auto insurance industry is maximizing its profits by accepting limits on the rates it charges for its policies. By any standards, this damages the interests of consumers and ensures everyone pays too much for their coverage.